Ch. 6.3 & 6.5

When economies of scale exist, a decrease in the level of output will lead to: A. a decrease in cost per unit. B. an increase in cost per unit. C. no change in cost per unit. D. an increase in total cost. E. both b. and d. above

B. an increase in cost per unit. When economies of scale exist, a decrease in the level of output will lead to an increase in cost per unit. Economies of scale is a situation on which the long-run average total cost of production falls as the quantity of output increases, or vice versa (See graph below). Economies of scale exist because fixed cost and overheads can be spread over as the quantity of output increases. Other reason may be that as more unit of output are produced workers become more specialized and efficient. So, it is possible for a firm to obtain some cost saving by scaling up the firm's operation.

Total variable costs: A. increase as production increases. B. are costs associated with short-run fixed capital. C. decrease as production increases. D. are so named because they vary from firm to firm within an industry.

A. increase as production increases. Total variable costs are the costs that do vary with the quantity of output produced for a given production process within a firm. Typical examples of variable costs are raw materials, temporary worker wages, piece rate labor (paid for unit of production completed), sales commissions, production supplies, energy bills, fuel purchases, transportation costs and shipping charges. Obviously, in order for production to increase, total variable costs must increase.

Which of the following is most likely to be a fixed cost for a business? A. payment for raw materials used in manufacturing goods B. interest payments on a loan used to finance the construction of a building C. shipping charges for the delivery of products D. wages paid to temporary workers

B. interest payments on a loan used to finance the construction of a building A fixed cost is the one that does not vary with quantity produced. The interest payments on a loan used to finance the construction of a building is a likely example of a fixed cost. In a given month it does not make any difference if the construction advances 2% or 10%, the interest to be paid to the bank is the same.

Constant returns to scale indicate that a firm is experiencing: A. an increasing marginal product. B. per unit costs of production that remain stable as the scale of output expands. C. per unit costs of production that are increasing as the scale of output expands. D. per unit costs of production that are decreasing as the scale of output expands.

B. per unit costs of production that remain stable as the scale of output expands. Constant returns to scale indicate that a firm is experiencing per unit costs of production that remain stable as the scale of output expands. Constant return to scale is a situation on which the long-run average total cost of production stays the same as the quantity changes.

Fixed costs are best defined as: A. the change in total cost when one more unit of output is produced. B. costs that vary with output. C. costs that do not vary with output. D. the sum of all marginal costs. E. costs that decline as output increases.

C. costs that do not vary with output. A fixed cost is a cost that does not vary with the quantity produced. In a pizza parlor, the monthly rent is a fixed cost, since it is the same regardless of how many pizzas are produced and sold. In a big corporation, the monthly administrative expenses are generally fixed, regardless of how much output is produced. In the short run analysis of costs, production costs are classified as fixed or variable: a) Fixed costs are the costs that do not vary with output produced. b) Variable costs are the costs that vary with output produced.

The marginal cost of a good is: A. the difference between average total cost and average variable cost. B. always equal to average variable cost when the firm is maximizing profit. C. the addition to total cost from producing one more unit of output. D. decreasing whenever average total cost is decreasing.

C. the addition to total cost from producing one more unit of output. The marginal cost of a good is the change in total cost resulting from producing one more unit of output. Mathematically, marginal cost is estimated by dividing the change in total cost by the change in output. When the output increases by one unit, the marginal cost can just be figured out by subtracting the total cost before that unit was produced from the total cost including the cost of producing the additional unit. If the total cost of producing 100 units is $ 20.00 and it increases to $ 20.50 when producing 101 units, then the marginal costs is simple $ 20.50 - $ 20.00 = $ 0.50

The sum of Average Variable Cost (AVC) and Average Fixed Cost (AFC) equals: A. total variable cost. B. marginal cost. C. accounting profit. D. average total cost.

D. average total cost. The sum of average variable cost (AVC) and average fixed cost (AFC) equals average total cost (ATC). The total cost (TC) is the sum of fixed costs (FC) and variable costs (VC), fixed costs being those costs that do not vary with the output produced, and variable costs being those costs that do vary with the output produced. Mathematically, TC = FC + VC. Average total cost is total cost divided by the quantity of output; average fixed cost is fixed cost divided by the quantity of output; average variable cost is total variable cost divided by the quantity of output. So, ATC = TC / Q = (FC + VC) / Q = FC / Q + VC / Q = AFC + AVC Example: For a given month, Dan Keene Boxing Matches Inc. has promoted 5 (Q = 5) matches with the following cost structure: Fixed cost = $8,000; Variable cost = $17,000 TC = FC + VC = $8,000 + $17,000 = $25,000 AVC = $25,000 / 5 = $5,000 AFC = $8,000 / 5 = $1,600 AVC = $17,000 / 5 = $3,400 AVC = AFC +AVC = $1,600 + $3,400 = $5,000. Equations to keep in mind: TC = FC + VC ATC = TC / Q = FC / Q + VC / Q = AFC + AVC

Assuming fixed costs are positive, over a range of output in which average total costs were constant, A. average variable costs would be falling as output increases. B. average variable costs would be constant as output increases. C. marginal cost would be less than average variable cost. D. average variable costs would be rising as output increases.

D. average variable costs would be rising as output increases. Since Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC), it follows that Average Total Cost (ATC) = Average Fixed Cost (AFC) + Average Variable Cost (AVC). Given that AFC always decreases as output increases, it has to be that AVC increases if ATC remains constant over a range of output. Since AFC = FC / Q, given that the numerator does not change, while the denominator increases, it has to be that AFC always decreases as output (Q) increases. Equations to keep in mind: TC = FC + VC ATC = TC / Q = FC / Q + VC / Q = AFC + AVC

When economies of scale exist: A. per unit production costs remain constant as output expands. B. per unit production costs increase as output expands. C. marginal cost must decrease as output expands. D. per unit production costs decline as output expands.

D. per unit production costs decline as output expands. When economies of scale exist per unit production costs decline as output expands. Economies of scale is a situation on which the long-run average total cost of production falls as the quantity of output increases, or vice versa (see graph below). Economies of scale exist because fixed cost and overheads can be spread over as the quantity of output increases. Other reason may be that as more units of output are produced workers become more specialized and efficient. So, it is possible for a firm to obtain some cost saving by scaling up the firm's operation.

Don Keene promotes boxing matches. He makes $6,500 per fight. Which cost is most relevant to a decision as to whether to promote one more fight? A. the average fixed cost of promoting a boxing match B. the average total cost of promoting a boxing match C. the total cost of promoting all boxing matches during the year D. the marginal cost of promoting one additional boxing match E. the sunk cost of promoting previous boxing matches

D. the marginal cost of promoting one additional boxing match For Don Keene, the promoter of boxing matches, the cost which is most relevant to a decision as to whether to promote one more fight is the marginal cost. In Economics, many economic decisions are made "at the margin." What matters is the incremental change.